Dissolving Entities to Avoid BOI Reporting
Are you in the process of closing or dissolving your reporting entity? While reasons for closure/dissolution vary dramatically from economic reasons to early retirement, every business owner shares one thing in common: nobody wants to contend with penalties while during the process of, or at the conclusion of, a dissolution. A dissolved or dissolving entity is not exempt under the rule, but what if dissolution occurs before the reporting deadline?
Unfortunately, FinCEN has not provided clear guidance, so it will fall to each reporter to make prudent decisions in reporting.
Advantages and Disadvantages of Dissolving an Entity
The advantages of dissolving an entity include not having to file annual reports, nor comply with FinCEN BOI reporting requirements (although see our comments below).
The disadvantages of dissolving can be somewhat severe, depending on the circumstances of your company, and outstanding liabilities, and more. Specifically, think of a corporate entity (Corporation, LLC, etc) as a garbage bag. It keeps the the animals away from the garbage, and the garbage away from your pristine home or yard. Get rid of the garbage bag, and things can get messy.
That’s the same for dissolving a corporate entity. When you dissolve the entity, it’s troubles and liabilities don’t simply “go away.” Instead, you’ve just removed the one layer of protection that keeps trouble from attaching to you personally.
Another problem is once you dissolve your corporate entity, most people cancel the Registered Agent services. YOU SHOULD NOT DO THAT. Instead, keep the Registered Agent at least for the statute of limitations of written contract disputes. In New Mexico, that is 6 years. Why? If the LLC is sued, even if dissolved, you’ll get notice of the lawsuit and will be able to defend yourself instead of getting a default judgement. We’ve seen $20,000 matters balloon into large six-figure default judgements (you’re not there to defend yourself, leaving the opposing party to argue why they deserve punitive damages and attorneys fees).
Dissolving and FinCEN Reporting Requirements for BOI
An owner seeking to close down a business has an interest in doing so efficiently and with minimal cost and effort. However, this is not the time to be caught off guard. If your company successfully dissolves or closes down, that eliminates your last line of defense for personal liability, and FinCEN will look to hold you personally liable for any and all civil penalties. Let’s analyze the factors involved in reporting requirements for companies in such a circumstances.
Unfortunately, FinCEN has not offered any specific guidance regarding these issues. It seems unlikely FinCEN will address these issues at all since they are a naturally expiring problem. If FinCEN fails to produce any guidance, it can be assumed they will dispose of questions on a case-by-case basis (and when they do, we’ll certainly update our information here at BOI-Labs), which could be dangerous for the entity that decides to gamble with the disclosure of BOI. Make prudent decisions, do not be the example case for what not to do.
First of all, let’s consider basic gatekeeping requirements for reporting at the onset. If your business was formed between 2024 and 2025, it must report even if it closes down within the year. Bear in mind that just because a business might close up shop, unless your status with the secretary of state or filing agency within your state changes or is stricken, in the eyes of FinCEN it is still an active business. Moving forward, you may still be required to report or to submit a revised report if the entity does not entirely fall within the status of an inactive entity on any date after January 2, 2025.
If your company is dissolving or going out of business, promptly ensure the proper documents are filed with the Secretary of State of your jurisdiction, if any. Your entity is in all likelihood still a reporting entity despite a change of status with the Secretary of State, because the filing of such documents is a condition precedent for becoming a reporting entity in the first place. This condition might be met, but the changing circumstances of the business may warrant analysis on whether or not the entity now falls under an exemption category. Provided the entity becomes “inactive” or “dissolved” in this way, and the business effectively ceases operation, chances are fair that the reporting status of the entity has changed as well. The entity may qualify as an inactive entity for reporting purposes (only if formed prior to Jan 1st, 2020). Just because status may have changed to an exempt entity for purposes of reporting BOI to FinCEN, this does not necessarily relieve the entity from making a final report regarding the change in status.
FinCEN has not offered specific guidance as to whether or not a company formed before 2024 will have to report if it dissolves before 2025. However, FinCEN has specifically required an updated report in the event an entity’s reporting status changes. At a minimum, a report should be sent regarding a change in the reporting status of the company. In reality given the nature of the penalties that can be imposed on an individual personally, especially without any potential corporate shield, an initial report should probably be sent along with a report of a change in an entity’s reporting status. The requirements for reporting a new exempt status is simply to identify the reporting company and indicate the new exempt status.
If your entity was formed before 2024, but will be dissolved before the reporting deadlines in 2025, and your entity satisfied the requirements for reporting, it seems most prudent that you file a report of a change of entity status as exempt before the deadline at a minimum. In order to avoid any potential penalties, a more cautious approach would be to file a report disclosing beneficial ownership information followed by a change of status report after the dissolution finalizes or at any other appropriate time when the entity falls under an exempt entity status.
